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Five ways to stop everyone hating the federal equalization program

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Today Albertans will let the rest of Canada know how they feel about the federal equalization program.

Maybe the rest of the country is already well aware of how Alberta feels about equalization, but at least, by the end of October, it will be official.

By Oct. 26, municipalities across Alberta will report the results of a province-wide referendum on whether Canada should remove the reference to equalization from the Canadian Constitution.

Polling conducted last week shows that Albertans are solidly in favour of removing equalization from the Constitution, although there is still significant uncertainty about the vote due to the low turnout cities tend to see for municipal elections.

If Albertans vote against equalization, some experts believe it could bring about negotiations with the federal government, similar to Quebec’s referendum on seceding from Canada. Other experts believe the “Quebec precedent” is valid only for a referendum on secession. Either way, a “yes” victory on Monday will set up an intriguing situation between Alberta and the federal government.

One of the problems with tweaking equalization is that it can be a zero sum issue, with changes supported by one province invariably opposed by another. But if the federal government decides to substantially change the equalization program, there are a few options it could take, either drastic or minimal.

In that event, here are a few choices for Prime Minister Justin Trudeau if he decides to listen to Albertans and revamp the federal equalization program.

Remove non-renewable resource revenues

The equalization formula attempts to calculate a province’s “fiscal capacity,” which is the amount of revenue it would take in with median tax rates.

This calculation stops a province from lowering its tax rates, and therefore its revenues, and turning to the federal government for help through equalization. But it’s still possible for a province to game the system either by artificially lowering electricity rates or not developing some resource deposits.

Some provinces have even called for removing non-renewable resource revenue from the calculation to avoid creating bad incentives. Removing these revenues from the formula may tweak the payments around the margins, likely benefiting Newfoundland and Labrador the most, but it wouldn’t change anything for Alberta or Saskatchewan. Currently, 50 percent of non-renewable resources count towards the formula.

“Removing nonrenewable resource revenues from the equalization formula would not change Alberta’s status as a nonrecipient province because it has the strongest economy in Canada,” wrote a team of policy experts at Policy Options.

Change the formula to a GDP-based system

One innovative way of changing the formula would be to move away from the idea of “fiscal capacity” altogether.

A simple way to calculate equalization payments would be to have a formula based on GDP per capita, said University of Calgary economist Trevor Tombe in today’s Hub Dialogue.

Tombe said basing the formula on GDP would make it difficult for provincial governments to game the system.

“It is something that can be nudged up or nudged down through policy choices, but it wouldn’t be subject to the same direct ability to affect in the same way as resource revenues are,” said Tombe.

A GDP-based formula could have some unexpected outcomes, too. For example, Tombe noted that British Columbia’s fiscal capacity is elevated by high real estate prices, which wouldn’t be reflected in the same way with a GDP calculation, possibly pushing the province into payment-receiving status.

Remove the cap

One of the strange quirks of the federal equalization program is that a cap that was brought in to limit the growth of the program is now functioning as a revenue floor, generating constant growth even as the disparity between provinces shrinks.

This quirk has led to some strange outcomes, such as Ontario continuing to receive payments even as it made the transition from “have-not” province to “have” province.

“Eliminating the requirement of constant growth in program costs should be seen as a prerequisite for additional reforms,” write Ben Eisen and Joel Emes at the Fraser Institute.

This change wouldn’t soothe the grievances of any particular province and, in fact, it may create a whole crop of new grievances. But it would go a long way to satisfying economists who can’t figure out why the program continues to grow even as the problem it aims to solve gets better.

Create a commission to review the formula

With the equalization program becoming something of a political lightning rod lately, it may be helpful to take the politics out of it.

Tombe has suggested that Canada take a lesson from Australia and convene a panel of experts tasked with reviewing and amending the formula every few years.

“I think we could think about having institutional changes to the equalization formula, so that the formula itself wouldn’t be the focus of so much political attention in the way that it is, and regularized adjustments to it became normalized,” said Tombe, in a recent discussion at The Hub.

Equalization rebates

In the recent federal election, the Conservative Party announced a policy innovation that aimed to find a solution for Canadians annoyed at the equalization program.

Because the equalization formula uses a three-year average of a province’s fiscal capacity, it’s not well-placed to provide relief during temporary economic downturns. The federal fiscal stabilization program is better-suited for relief during a recession, but that program has been chronically under-funded.

The Conservatives promised to boost the fiscal stabilization fund, cutting Alberta $4 billion cheque in the process, and advertised it as an “equalization rebate,” winning praise for the policy and the marketing.

Hub Explainer: So who is running the government right now?

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It is well known that a “caretaker” government operates during an election campaign, with a focus on routine proceedings, urgent matters and all-party collaboration on important issues that arise.

But what happens after election day, in that uncertain period before a new cabinet is sworn in and before Parliament is recalled?

At some point, between election day and the resumption of Parliament, the government shifts out of caretaker mode and into normal day-to-day business.

The precise moment is often a mystery. It’s not publicly announced and, in minority Parliaments when the incumbent wins, it’s often based on a subjective test of whether or not the governing party believes it can gain the confidence of the House of Commons.

In response to The Hub’s questions to the Privy Council Office about when and how the caretaker mode was lifted in the current government, media relations officials said only that the PCO “works closely with departments to provide advice and guidance on issues relating to the caretaker convention.” Wednesday’s major announcement on vaccine mandates for public servants and air and rail travellers implies heavily that the government is operating at full capacity now, though.

According to scholars, the government must clear one of two hurdles to shift out of caretaker mode after an election, with one being obvious and objective and the other being more subjective.

The most obvious sign is when a new cabinet is sworn in, which means the government is ready to start governing without any caretaker restrictions. We’re still waiting on Prime Minister Justin Trudeau to appoint his new ministers, but he already has a cabinet assembled from the previous government.

The second test is less obvious and far more subjective. The Privy Council Office advises that a government can shift out of caretaker mode “when an election result returning an incumbent government is clear.” This is the guideline that matters now.

After the September election, which gave the Liberals a plurality of seats, it looks like the government has cleared the second test, but “you could, looking at the language of the guidance, say no,” said Philippe Lagassé, an associate professor at Carleton University, who researches the Westminster system of government.

That means pundits, scholars and opposition MPs are free to quarrel with the idea that we just witnessed a “clear” victory for Trudeau, but the discussion is mostly academic.

The caretaker guidelines are a Parliamentary practice, not even rising to the level of a convention and, in the end, it is “ultimately dependent on the prime minister’s call,” said Lagassé.

Is there a better way?

It might seem odd to leave a subjective decision like this in the hands of the prime minister. He may, after all, be biased.

Trudeau has been vocal recently about winning a “clear mandate” in the election, despite some quibbles from critics and pundits.

In the U.K., most of the uncertainty is taken out of this transition period by almost immediately recalling Parliament. That means minority governments have to sort out plans for maintaining the confidence of the House and the make-up of the new cabinet within a week or two of election day.

The practice in the U.K. is that Parliament will have its first meeting in under 12 days, which was a guideline adopted in 2010. Before that, Parliament was convened on the Wednesday following the election. In Australia, Parliament has to reconvene within 30 days and in New Zealand, the government has six weeks to bring Parliament back.

This is a stark contrast to the practice in Canada. Paul Martin’s Liberal minority government took nearly 100 days from election day to throne speech in 2004. In 1979, Joe Clark’s Progressive Conservative government took a whopping 141 days to get a throne speech together after election day.

“It says something about our attitude towards Parliament that it’s a bit of an afterthought. You’re going to have the swearing-in of cabinet, and then after that, we’ll get around to reopening Parliament,” said Lagassé.

If Canadians grew tired of these laggard governments, they could follow the example of the U.K. system and codify some expectations for when Parliament should be recalled in a cabinet manual. In 2011, then-Prime Minister David Cameron published the U.K.’s current two-week rule in that document making it harder for subsequent governments to flout the guideline.

What happens to ministers?

One of the quirks of Canada’s parliamentary system is that defeated members of Parliament can still hold cabinet spots after the election. In the September election, four Liberal cabinet ministers lost their seats, with three being defeated and one resigning.

And although Infrastructure Minister Catherine McKenna was recently tweeting about how she’s not sad to be out of politics after retiring as a member of Parliament, she is actually still in charge of her department until Trudeau appoints a new minister.

Maryam Monsef, the minister for women and gender equality and rural economic development, Bernadette Jordan, the minister of fisheries and Deb Schulte, the minister for seniors, are all in similar spots after losing their seats in the election.

Lagassé said there’s a few options for the government in this case. One is that the unelected minister continues doing the job as usual until the new minister comes in.

“Individual ministers retain their authorities, even if they will not be returning to the House of Commons, until a new minister is sworn into their position,” said Stéphane Shank, a media relations officer in the Privy Council Office. “By convention, a returning government continues to exercise a degree of restraint, to the extent possible, until a new/revised ministerial team is sworn-in.”

Another option involves transferring that power.

“The deputy minister can act in the minister’s stead in almost all matters, so day-to-day kind of functions of the department are not really affected. And similarly, in a pinch, you can even pass regulations transferring functions to another minister as necessary,” said Lagassé.

When should we expect a speech from the throne?

After the 2019 election, in which Trudeau’s majority government was demoted to a minority one, it took 46 days from election day until the throne speech.

The average since 1968 is 69 days for a government to recall Parliament, but it’s possible that the level of urgency will be higher this time.

Since the 2021 election occurred in the midst of a global crisis, the best one to compare it to could be the 2008 federal election: where an incumbent minority government was re-elected with another minority parliament in the midst of the 2008 global financial crisis.

It took Stephen Harper’s re-elected Conservative minority government 36 days from election day to the day of the throne speech, which is one of the quickest transitions in the last 50 years.